NAFTA re-negotiations

It has been hard to ignore what is happening in the United States right now, as Trudeau senior once said, it is “the elephant sleeping next to us, a small Canadian flea, that feels everything.” Furthermore, now the North American Free Trade Agreement (NAFTA) renegotiations are starting with comments in the media every day, including threats from President Trump to cancel it all together.

The Trump administration released their list of specific goals for a new NAFTA on July 17th and “Government procurement” made the list. As Vanguard readers all know, government procurement is very, very complicated and industry executives trying to sell their solutions quickly, whether they like it or not, become experts in government, politics, and policy if they want to be successful.

Foreign Affairs Minister Chrystia Freeland’s position on the matter was that “government contracts are political junk food – superficially appetizing, but unhealthy in the long run.” That may be, but if it is coming up in these negotiations, we must ensure we get our fair share. The US Government is by far the largest government customer in the world, buying over half a trillion Canadian dollars; and they make almost all of their purchases locally.

Of that, defence (or “defense” in the US) is the largest discriminatory portion of that budget. For the most part, the “elephant sleeping next to us” has figured out how to drive long-term social and economic gains, particularly driving technology investments in their own country through the spending that needs to be made anyways. Even beyond just Government spending, when the US Government has to approve something, they point to “what is the jobs impact to our country.”

On the day of writing this article, the last day of August, the US Government came out strongly against imposing duties on the Bombardier C Series, clearly a Canadian aerospace “star child”, because Bombardier had communicated the powerful, positive economic impacts to the US from the C Series supply chain. When we get down to the details of what company, contract or sector will be highlighted, jobs and local impact to that country will matter, and technology and big data analytics will play a role in communicating those impacts.

If we go back, the defence sector happened to be the first industry to achieve a form of free trade between Canada and the US with the Defence Industry Productivity Sharing Agreement of 1956. This agreement, in theory, gave Canadian industry duty-free access to the US market, and exemption from the punishing 1933 Buy America Act that restricted US Federal government procurement to American companies. Since then, we all know the story – free trade has expanded dramatically, to, what we now know, the benefit of both countries. We adopted the Autopact in 1965, the Free Trade Agreement in 1988, and finally NAFTA in 1994.

Meanwhile, trade in government procurement between the two countries has been under siege from protectionist measures. The US government has enacted many set aside programs to benefit local interest groups and disadvantaged businesses. And while NAFTA exempted Canada and Mexico from Buy American restrictions, the 2009 American Recovery and Reinvestment Act flowed federal stimulus funds down to states and municipalities with the Buy America Act provisions attached.

This was essentially a work around the NAFTA commitment and froze Canadian firms out of these projects. It is estimated that US Government procurement is four times larger than Canada’s on a per capita basis. This is a gigantic, elephant size market that we are missing out on.

There is a lot of spending on the table for Canadians; about $6B in defence and $9B in other sectors per year. While the defence sector has always and continues to be deemed special because of the national security exemption with the World Trade Organization, there is a lot of additional spending in Canada that we could leverage to achieve other ambitious social and economic objectives and to drive further investment in our technologies that apply to either sector.

The defence sector as most Vanguard readers know requires local economic benefits, which is managed by Innovation, Science and Economic Development Canada (ISED). This policy was upgraded in 2014 as a result of the Jenkins report, which I played a small role in. I believe the time is ripe to start talking about driving additional local economic benefits from infrastructure, energy, mining and other sectors in Canada. Government procurement can be a very powerful lever to drive investments in key, Canadian-owned technology.

If government procurement is a target of the NAFTA renegotiations, then we should take the time to ask some of the hard questions, drill into the real country of origin data throughout our supply chains, and use data to drive decisions. I am not a protectionist, I just know that “Government procurements” have always had their own story when it comes to trade, and we have a very real opportunity to level the playing field in these renegotiations. There is too much at stake.

In addition, we need to ensure the upcoming NAFTA renegotiations don’t hurt our ability to innovate in the digital economy. For most people, hearing the acronym “NAFTA”, usually makes you think about the automotive or other traditional manufacturing industrial sectors, but embracing the digital economy will be key for businesses to stay competitive and continue to grow. Only 18 per cent of North America is digitized today, which provides a huge, blue ocean of open opportunities for entrepreneurs on each side of the border and for traditional sectors in Canada to adopt and thrive globally. I am sick of people referring to “tech” as its own sector.

Technology is the key to driving innovation and increased competitiveness in all sectors, especially the heavier industrial, physical businesses that we tend to think about when we think about agreements like NAFTA, defence included. We need to incentivize entrepreneurs and companies to embrace technology, including digital technologies that will make them more competitive.
According to McKinsey, cross-border data flows grew by 45 times between 2005 and 2014 and will grow another nine-fold in the subsequent five years. These data flows generated $2.8 trillion in economic value in 2014—a greater impact on world GDP than the actual global trade in physical goods. With the exponential growth of technology, Moores law is nearly impossible for us to visualize.

Once you get into the latter half of the curve, you can’t picture the number of shipping containers in the physical world, let alone understand the implication when it comes to digital consumption happening nano seconds after our hearts desire it. Consuming and specifically exporting digital technologies happens by entering your login and password into a website as opposed to physically shipping a product over a border. It is hard to visualize, but yes, when you are using a US-based digital product, you are importing a good in real time. The same thing occurs when our users log into OMX from all over the world, we are exporting our digital product to them.

“Digital” is growing faster than any other trade sector, and if barriers to digital trade are reduced, or avoided, in NAFTA 2.0, we have an opportunity to capitalize on our capabilities. One area the US is anti-protectionist is digital trade, likely because they dominate global trade in digital. In the TPP negotiations, for instance, the US supported an opening up of digital trade. TPP actually disallowed EU and Canadian provinces such as British Columbia and Nova Scotia’s laws that require personal data to be stored locally, referred to often as “localization”. The sentiment in TPP was to open up the digital economy, a sentiment I share.

Embracing this new economy and the immense flows that pass virtually across borders takes courage. It sure would be nice to come out of the upcoming negotiations with a competitive edge on our ability to consume and sell digital products across the virtual border.

Nicole Verkindt is the technology editor of Vanguard magazine and founder and president of OMX. She is a board member of the Canadian Commercial Corporation and was recently appointed to the board of the Peter Munk School of Global Affairs.

Nicole Verkindt is the technology editor of Vanguard Magazine and founder and president of OMX. She is a board member of the Canadian Commercial Corporation and was recently appointed to the board of the Peter Munk School of Global Affairs.
Nicole graduated from The University of Western Ontario, Richard Ivey School of Business. She founded OMX in December 2011, with the intent to assist Canadian companies in leveraging government procurements and secure contracts, growing their businesses into high tech and international supply chains - with maximum benefit to the economy.
She is passionate about reading, travel, international aid, skiing and running. She speaks English, French and Spanish.

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Vanguard is Canada’s oldest trade journal of record that provides a forum for Canada’s security and defence community, discussing strategic perspectives and overviews of government and military policy and practice, through interviews with leading practitioners and contributions from renowned experts, including representatives from industry.